THE MAJORITY RULES FOR THE MAJOR INDEX ETFS -- SMALL-CAP AND MICRO-CAP ETFS BREAK OUT -- VAST MAJORITY OF SECTOR ETFS HIT NEW HIGHS -- S&P 1500 AD LINE AND AD VOLUME LINE HIT NEW HIGHS -- HIGH-LOW PERCENT SURGES TO HIGHEST LEVEL SINCE MARCH
THE MAJORITY RULES FOR THE MAJOR INDEX ETFS... Link for today's video. The Russell 2000 ETF (IWM), Russell MicroCap iShares (IWC) and S&P SmallCap iShares (IJR) are underperforming and well below their March highs, but they are the minority and may be poised to play catch-up. In contrast to these three, seven other major index ETFs hit new highs this week:
- S&P 100 ETF (OEF)
- S&P 500 SPDR (SPY)
- Equal-Weight S&P 500 ETF (RSP)
- S&P MidCap SPDR (MDY)
- S&P 1500 ETF (ITOT)
- Russell 1000 ETF (IWB)
- Nasdaq 100 ETF (QQQ)
Of note, the Equal-Weight S&P 500 ETF broke to new highs in late May and the S&P MidCap SPDR hit its new high this week. Large-caps have always been strong. Selling pressure appeared as we moved down in market-cap (large to small). Before getting too concerned with relative weakness in IWM, keep in mind just how small the Russell 2000 actually is. I pointed this out last week and will include a table from Russell Investments today (russell.com).
Chart 1
The Russell 3000 accounts for 98% of the US investable equity universe and can be broken down into the Russell 1000 and Russell 2000. The Russell 1000 represents the largest stocks and accounts for 92% of the Russell 3000. The Russell 2000 represents the smallest stocks and accounts for 8% of the Russell 3000. This means the Russell 2000 is less than 8% of the total US stock market.
SMALL-CAP AND MICRO-CAP ETFS BREAK OUT... Given their relative size, it would not take much to move the small-cap and micro-cap indices. In fact, a relatively small rotation from large-caps to small-caps could easily trigger a 10% move, which is why the Russell 2000 is more volatile than the S&P 500. Chart 2 shows the Russell 2000 ETF (IWM) finding support in the 106-108 area from the lows extending back to November. The ETF broke the rising 200-day in mid May, but moved back above in late May and surged above 115 this week. Also notice that the ETF broke back above the 50-day. These are bullish developments until proven otherwise.
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Chart 2
Chart 3 shows the Russell MicroCap iShares (IWC), which represents the wild west of the stock market. These are the smallest stocks and usually have the highest betas (risk). I am showing a weekly chart to put the March-May decline into perspective. Notice that the index advanced some 75% from November 2012 to February 2014. The decline retraced 38% and formed a falling wedge. Both the decline and the retracement are typical for corrections in uptrends. The breakout over the last two weeks reverses this correction and signals a continuation of the bigger uptrend. Perhaps this advance will be the famous fifth of the fifth of the fifth (wave). Regardless of wave count, this breakout is bullish until proven otherwise and I would mark first support at 70.
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Chart 3
VAST MAJORITY OF SECTOR ETFS HIT NEW HIGHS... The sectors also paint a picture of strength, not weakness. There are nine sector SPDRs and nine equal-weight sector ETFs. Of these 18 ETFs, note that 15 hit new highs this week. The list below shows each sector with the SPDR symbol and the equal-weight symbol.
- Consumer Discretionary: XLY and RCD are below their March highs
- Technology: XLK and RYT hit new highs this week
- Finance: XLF and RYF hit new highs this week
- Industrials: XLI and RGI hit new highs this week
- Energy: XLE and RYE hit new highs this week
- Materials: XLB and RTM hit new highs this week
- Consumer Staples: XLP and RHS hit new highs this week
- Healthcare: XLV and RYH hit new highs this week
- Utilities: XLU is near the March high and RYU hit a new high
The Utilities SPDR is just below its March high and has yet to break above it. The Consumer Discretionary SPDR (XLY) and Equal-Weight Consumer Discretionary ETF (RCD) remain below their March highs and are the "least strong" of the sectors. Even though XLY and RCD are lagging, they are not looking that weak because both broke above resistance zones. Chart 4 shows XLY hitting resistance at 65 from mid April to mid May and then breaking above with a surge the last two weeks. Also note that XLY recorded a new high in early March and held above its February low in April. This means bigger trend remains up for the most economically sensitive sector. The indicator window shows the XLY AD Volume Line ($XLYUDP) breaking out and hitting a new high.
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Chart 4
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Chart 5
Chart 5 shows the Equal-Weight Consumer Discretionary ETF with similar characteristics and the XLY AD Line ($XLYADP) hitting a new high. The AD Line and AD Volume Line are aggregate measures of participation. The AD Line favors small and mid-caps because an advance equals +1 and a decline equals -1, regardless of market cap. The AD Line is a summation of net advances (advances less declines) for each day. An uptrend in the AD Line indicates broad participation in an advance. In contrast to the AD Line, the AD Volume Line favors large-caps because large stocks usually have the most volume. The AD Volume Line is a summation of net advancing volume, which is advancing volume less declining volume. The new high in the AD Volume Line indicates that more volume (money) is behind advancing issues than declining issues. Put another way, buying pressure is stronger than selling pressure.
S&P 1500 AD LINE AND AD VOLUME LINE HIT NEW HIGHS... The S&P 1500 is a broad-based index that includes the S&P 500, S&P Small-Cap 600 and S&P MidCap 400. Large-caps were strong all along. Small-caps were weak from March to mid May. Mid-caps were somewhere in between. Chart 6 shows the S&P 1500 AD Line ($SUPADP) moving sideways from early March to mid May and then surging to a new high over the last two weeks. A new high in the AD Line confirms the new high in the underlying index (S&P 1500). In other words, there are no signs of underlying weakness in this indicator right now. Chart 7 shows the S&P 1500 AD Volume Line ($SUPUDP) breaking out in late May and hitting new highs this week.
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Chart 6
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Chart 7
HIGH-LOW PERCENT SURGES TO HIGHEST LEVEL SINCE MARCH... Chart 8 shows the S&P 1500 High-Low Line ($SUPHLP) in the main window and High-Low Percent in the first indicator window. The High-Low Line is a summation of new net highs, which is new highs less new lows. The High-Low Line has been above its 10-day EMA the entire year. It flattened in late January and early February, but never really buckled because new lows did not expand much. The bulls clearly have the edge as long as this indicator is rising (i.e. above its 10-day EMA). The indicator window shows High-Low Percent dipping into negative territory four times this year. These dips occurred during corrective periods and ended when the indicator moved back above 2.5%, which it did on May 19th. New highs seriously expanded this week as High-Low Percent surged above 10% for the first time since March. Participation clearly broadened this week.
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Chart 8
ECONOMIC AND LABOR CUPS REMAIN HALF FULL... It was a big week for economic reports and these reports continue to be more positive than negative. The table below shows the reporting schedule for this month. The ISM Manufacturing Indices and ISM Non-Manufacturing Indices were well above 50, which favors economic expansion. The ISM Non-Manuf Business Activity Index has been above 60 the last two months. Auto sales surged to their highest level since 2007. The ADP Employment numbers were below expectations, but still came in on the positive side with 179,000 new jobs created in the private sector. Initial jobless claims continue to inch their way toward 300,000 and non-farm payrolls have been above 200,000 for three months in a row. The economic cup remains half full and this supports a long-term uptrend in the stock market and further weakness in Treasury bonds. Chart 10 shows a screen shot from the symbol catalog. Simply search for $$ to see the economic indicators available at StockCharts.
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Chart 9
